By how much?
The Book of Business is the primary determinant of your current and potential loss. We use data found in rate filings to calculate average and aggregate loss per policyholder.
The term Economic Harm Modeling (EHM) was first introduced in the Skochin v. Genworth settlement discussion. EHM identifies policyholder loss exposure as result of the industry’s pricing practices.
EHM has 3 distinct components:
- Present Value (PV) past overcharges due to premiums that exceed a fair premium (SDN);
- PV loss due to future premiums that exceed SDN;
- Average PV loss due to forced lapsing; In a rate filing, carriers frequently express what percent of policyholders are expected to abandon their policies. Lack of trust of the so-called insurance relationship is a leading cause of lapsing.
A fair premium (SDN) acknowledges carriers’ contractual right to reprice LTCI premiums given claims history and projection. However, SDN does not acknowledge the industry has the right to chargeback existing policyholders for past underpricing. In 2018, a group of actuaries seem to have admitted what was going on, a little late in the day.
For component #2, it is important to differentiate which premium is being compared to the SDN. Is it the current premium that a regulator has already granted? Or, is it the premium we expect will ultimately be granted because the Book is still underpriced by industry methods? For the latter, we use a Shock Lapse Premium (SLAP). SLAP is an instant repricing of the Book to meet its minimum statutory lifetime loss ratio (60% in CT).
Case of Economic Harm Modeling
This is a case of nearly 4,000 policyholders in CT. The Book’s SDN is 2.94x original premium in the aggregate. We estimate an average loss of $13.0K due to loss components #2 above as premiums will be stepped up (4.13x original) starting in 2021. This will result in a 29% chargeback. The carrier has indicated a forced lapse rate of 2.3%. Given the average contract value of $60,572, component #3 loss is $1,393 for a total average expected loss of $14.4K. Across the state, the net economic loss to seniors is approximately $56 million. If the Book were repriced to its SLAP of 15.75x original, the loss would grow to $101K per policyholder. The future does not look particularly bright for policyholders in this book.
This Book does not yet have a component #1 loss. Others do. We believe that component #1 loss will increase rather dramatically for all legacy LTCI products.
Here is a list of all states offering tax incentives for LTCI. If a premium contains pricing elements that are not in fact fair premium, a portion of the tax credits or deductions given are for a different purpose than what might have been intended. Who gains and who loses? More work on this question is needed.
We hope to report on other cases as our research evolves.